The following discussion should be read in conjunction with the Financial
Statements and Notes contained herein and with those in our Form 10-K for the
year ended December 31, 2021.
Except for the historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q include certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding our intent, belief,
and expectations, such as statements concerning our future profitability and
operating and growth strategy. Words such as "believe," "anticipate," "expect,"
"will," "may," "should," "intend," "plan," "estimate," "predict," "potential,"
"continue," "likely" and similar expressions are intended to identify
forward-looking statements. Investors are cautioned that all forward-looking
statements contained in this Quarterly Report on Form 10-Q and in other
statements we make involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Risk Factors" included in
our Annual Report on Form 10-K for the year ended December 31, 2021, and other
factors detailed from time to time in our other filings with the Securities and
Exchange Commission. One or more of these factors have affected, and in the
future could affect our business and financial condition and could cause actual
results to differ materially from plans and projections. Although we believe the
assumptions underlying the forward-looking statements contained herein are
reasonable, there can be no assurance that any of the forward-looking statements
included in this Quarterly Report on Form 10-Q will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
Any forward-looking statement speaks only as of the date on which such statement
is made, and we undertake no obligation to update any forward-looking statement
or statements to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events, unless
necessary to prevent such statements from becoming misleading. New factors
emerge from time to time, and it is not possible for us to predict all factors,
nor can we assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Executive Summary
For the nine months ended September 30, 2022, we had record total revenue of
$17,648,275. Higher pricing, primarily attributable to increased raw material
costs, higher volume and product mix were key factors that contributed to the
increase.
Gross profit was $3,543,352 for the nine months ended September 30, 2022
compared to $2,667,958 for the same nine months in 2021. The increase was due to
higher volume, favorable product mix, and improved manufacturing efficiency. The
first nine months of 2021 included a reduction of costs of approximately
$323,000 related to the Employee Retention Credit ("ERC") enacted in 2020.
Operating expenses were $1,727,901 and $1,187,353 for the nine months ended
September 30, 2022 and 2021, respectively. The first nine months of 2021
included a reduction of expenses of approximately $238,000 related to the ERC.
Income from operations was $1,815,451 and $1,480,605 for the nine months ended
September 30, 2022 and 2021, respectively.
We received additional manufacturing equipment during the third quarter of 2022.
This included a vacuum hot press that enables production of higher temperature
materials with increased capacity. It was purchased and installed for
approximately $500,000 which was paid in cash.
Consistent with our growth strategy, we have identified niche markets that can
benefit from our expertise in custom powder solutions, such as near-infrared
doped phosphors and short-wave infrared applications. These applications enable
extended life of phosphors for specific nighttime identification needs of
defense personnel and first responders.
New initiatives are also being pursued that utilize our vacuum hot presses, cold
isostatic press, and kilns for increased production and development projects,
including diffusion bonding. We recently manufactured and sold conductive metal
oxides for direct current sputtering of Tungsten Oxide and Molybdenum Oxide
materials. We continue to invest in developing new products for all our markets
including specialty bonding processes for Aerospace customers. Those products
continue to require research and development expense to accelerate time to
market.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Several issues continue to affect national and global market conditions. First,
inflation remains at historically high levels, impacting labor, raw material
costs and transportation expenses. We have generally been able to pass on these
increases to customers but are unable to predict how future or sustained
inflationary pressure may impact our results. Second, supply chain disruptions
are adversely impacting customers in certain markets. Thus far, we have not
experienced material adverse effects regarding product shipments; however,
timely deliveries and sourcing of certain materials is of increased concern.
Third, published articles and corporate announcements continue to address the
global semiconductor chip shortage, which is anticipated to continue into 2023.
This shortage is affecting some of our customers which could impact the
Company's revenue, volume, and profitability. Fourth, there are increased
political uncertainties affecting global markets. Although we currently have no
customers or vendors in Russia or Ukraine, we continue to monitor the situation
as some raw material comes from Russia for the PVD industry. We continue to
actively monitor these developments, including ongoing contact with our
suppliers and customers, including identifying additional suppliers and adapting
to our customers' specific circumstances and forecasts.
In March 2020, the World Health Organization declared the coronavirus disease
(COVID-19) a global pandemic and recommended containment and mitigation measures
worldwide. Since then, most federal, state, and local executive orders have been
lifted. Based on ongoing conversations with customers, we do not expect to
experience any material impairments or changes in accounting judgements related
to COVID-19. We continue to follow practical safety procedures as needed. During
the first nine months of 2022, we resumed in-person meetings, participated
onsite in industry trade shows, and continue to maintain regular contact, via
phone and other electronic means, with all customers and suppliers.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2022 (unaudited) compared to three and
nine months ended September 30, 2021 (unaudited):
Revenue
For the three months ended September 30, 2022, we had revenue of $5,816,838.
This was an increase of $605,669 compared to the three months ended September
30, 2021. For the nine months ended September 30, 2022, we had record total
revenue of $17,648,275. This was an increase of $7,442,747 compared to the nine
months ended September 30, 2021. Higher pricing, primarily attributable to
increased raw material costs, higher volume and product mix were key factors
that contributed to the increase.
Gross profit
Gross profit was $1,171,583 for the three months ended September 30, 2022,
compared to $1,302,368 for the same three months in 2021, a decrease of
$130,785. Increased raw material costs in the third quarter of 2022 combined
with the impact of the Employee Retention Credit (ERC) for the third quarter of
2021 offset higher volume and product mix. Gross profit was $3,543,352 for the
nine months ended September 30, 2022, compared to $2,667,958 for the first nine
months of 2021, an increase of $875,394. The increase in gross profit for the
nine months ended September 30, 2022 was due to higher revenue compared to the
nine months ended September 30, 2021. Gross profit as a percentage of revenue
(gross margin) was 20.1% for the third quarter and first nine months of 2022
compared to 25.0% for the third quarter of 2021 and 26.1% for the 2021
year-to-date period. The lower gross margin in 2022 compared to a year ago was
due to higher raw material costs and product mix during 2022. The Employee
Retention Credit (ERC) reduced cost of revenue in the three and nine months
ended September 30, 2021, by $84,763 and $323,038, respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
General and administrative expense
General and administrative expense for the three months ended September 30,
2022, and 2021, was $374,193 and $306,997, respectively, an increase of 21.9%.
This increase is attributed to higher compensation of $25,369, disposal of
assets with net book value of $18,860, and the ERC of $21,000 which reduced
expenses in the third quarter of 2021. General and administrative expense for
the nine months ended September 30, 2022, and 2021, was $1,170,782 and $878,586,
respectively, an increase of 33.3%. During 2022 there was an increase in
compensation of approximately $118,788, which included an increase in staff.
Business liability insurance (due to higher revenue) and professional fees,
primarily related to SEC compliance costs for legal, accounting and stockholder
relations fees, increased approximately $52,000. The nine months ended September
30, 2021 included the ERC of $78,000.
Research and development expense
Research and development expense for the three months ended September 30, 2022,
was $93,081 compared to $56,612 for the same period in 2021, an increase of
64.4%. Research and development expense for the nine months ended September 30,
2022, was $272,197 compared to $149,208 for the same period in 2021, an increase
of 82.4%. The ERC of $26,950 and $88,700 was included in the three and nine
months ended September 30, 2021, respectively. Specialty materials are being
researched for use in niche markets which include custom applications and
additive manufacturing. Our development efforts utilize a disciplined innovation
approach focused on accelerating time to market for these applications and
involve ongoing research and development expense.
Marketing and sales expense
Marketing and sales expense was $94,594 and $61,732 for the three months ended
September 30, 2022, and 2021, respectively. This was an increase of 53.2%.
Marketing and sales expense was $284,922 and $159,559 for the nine months ended
September 30, 2022, and 2021, respectively, an increase of 78.6%.
Travel expenses increased approximately $2,000 and $41,000 during the three and
nine months ended September 30, 2022, respectively, versus the same periods in
2021, as we resumed in-person meetings with some customers and participated
onsite in additional industry trade shows. The three and nine months ended
September 30, 2021, included the ERC of $21,000 and $71,183, respectively.
Stock compensation expense
Included in total expenses were noncash stock-based compensation costs of $8,670
for the three months ended September 30, 2022 and 2021, and $40,642 and $39,233
for the nine months ended September 30, 2022, and 2021, respectively.
Compensation expense for all stock-based awards is based on the grant date fair
value and recognized over the required service (vesting) period. Unrecognized
non-cash stock-based compensation expense was $2,758 as of September 30, 2022
and will be recognized through the second quarter of 2023.
Interest
Interest income was $363 for the three months ended September 30, 2022. Interest
expense was $8,156 for the three months ended September 30, 2021. Interest
expense was $11,899 for the nine months ended September 30, 2022, and $24,808
for the nine months ended September 30, 2021. The improvement during 2022 was
due to final payments of multiple finance leases during 2021 and the increase in
interest rates during the third quarter of 2022.
15
Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Income taxes
Income tax expense was $167,375 and $200,189 for the three months ended
September 30, 2022, and 2021, respectively, and $311,575 and $338,282 for the
nine months ended September 30, 2022, and 2021, respectively. At December 31,
2021, the deferred tax asset was $663,820. As of each reporting date, management
considers new evidence, both positive and negative, that could affect its view
of the future realization of deferred tax assets. Accordingly, management
determined that no valuation allowance was necessary, and the deferred tax asset
was $375,820 at September 30, 2022.
Income applicable to common stock
Income applicable to common stock for the three months ended September 30, 2022,
and 2021, was $442,703 and $662,644, respectively. The third quarter of 2021
included the ERC of $153,713 which reduced overall expenses. Income applicable
to common stock for the nine months ended September 30, 2022, and 2021, was
$1,491,977 and $1,424,701, respectively. The increase was primarily the result
of higher revenue and gross profit. Included in the first nine months of 2021
was the ERC which reduced overall expenses by $560,921.
Liquidity and Capital Resources
Cash
As of September 30, 2022, cash on hand was $5,614,257 compared to $4,140,942 at
December 31, 2021. The increase was principally due to record total revenue and
higher gross profit for the first nine months of 2022.
Working capital
At September 30, 2022 working capital was $5,443,552 compared to $3,907,135 at
December 31, 2021, an increase of $1,536,417 or 39.3%. Cash increased
$1,473,315, inventories increased $379,370, accounts payable increased $256,365
and receivables increased $156,805 while prepaid expenses decreased $586,565,
and customer deposits decreased $442,378.
Cash from operations
Net cash provided by operating activities during the nine months ended September
30, 2022, was $2,051,679 and $1,780,698 for the nine months ended September 30,
2021. In addition to the net income generated, this included depreciation and
amortization of $308,791 and $329,104, and noncash stock-based compensation
costs of $40,642 and $39,233 for the nine months ended September 30, 2022, and
2021, respectively.
The decrease in prepaid expenses was related to the receipt of inventory paid
for in December 2021 and received in January 2022. Inventories and accounts
payable increased due to orders received during the third quarter and throughout
the first nine months of 2022. Customer orders remain strong, and deposits are
lower as customers have monitored inventory more closely with continued
emphasis on intra-quarter shipments.
Cash from investing activities
Cash of $511,399 and $615,088 was used in investing activities during the nine
months ended September 30, 2022, and September 30, 2021, respectively, for the
acquisition of production equipment. This included a vacuum hot press that
enables production of higher temperature materials with increased capacity. It
was purchased and installed for approximately $500,000. A deposit of $220,075
was paid in the first quarter of 2021 for this vacuum hot press and the
remaining amount was paid in cash during the third quarter of 2022.
16
Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cash from financing activities
Cash of $72,131 and $123,715 was used in financing activities for principal
payments to third parties for finance lease obligations during the nine months
ended September 30, 2022, and 2021, respectively. The decrease was due to final
payments of multiple finance leases during 2021. A cash dividend payment of
$24,152 was made to owners of our Series B preferred stock during the nine
months ended September 30, 2021.
Debt outstanding
Total debt outstanding was $171,087 at September 30, 2022, compared to $243,218
at December 31, 2021, a decrease of 29.7%. As previously mentioned, cash of
$72,131 was used for principal payments for finance lease obligations during
2022.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements including special purpose entities.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported in the Financial Statements and accompanying notes. Note 2 to the
Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2021, describes the significant accounting policies and methods
used in the preparation of the Financial Statements. Estimates are used for, but
not limited to, accounting for the allowance for doubtful accounts, inventory
allowances, property and equipment depreciable lives, patents and licenses
useful lives, revenue recognition, income tax expense, deferred tax assets and
liabilities, realization of deferred tax assets, stock-based compensation and
assessing changes in which impairment of certain long-lived assets may occur.
Actual results could differ from these estimates. The following critical
accounting policies are impacted significantly by judgments, assumptions and
estimates used in the preparation of the Financial Statements. The allowance for
doubtful accounts is based on our assessment of the collectability of specific
customer accounts and the aging of the accounts receivable. If there is a
deterioration of a major customer's credit worthiness or actual defaults are
higher than our historical experience, our estimates of the recoverability of
amounts due us could be adversely affected. Inventory purchases and commitments
are based upon future demand forecasts. If there is a sudden and significant
decrease in demand for our products or there is a higher risk of inventory
obsolescence because of rapidly changing technology and customer requirements,
we may be required to increase our inventory allowances and our gross margin
could be adversely affected. The tax valuation allowance is based on our
consideration of new evidence, both positive and negative, that could affect our
view of the future realization of deferred tax assets. If we were to determine
we would not be able to realize all or part of the deferred tax asset in the
future, an adjustment to the deferred tax asset would be necessary which would
reduce our net income for that period. Depreciable and useful lives estimated
for property and equipment, licenses and patents are based on initial
expectations of the period of time these assets and intangibles will benefit us.
Changes in circumstances related to a change in our business, change in
technology or other factors could result in these assets becoming impaired,
which could adversely affect the value of these assets.
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